5 Key Points from the UK NSIA Annual Report

Posted Monday 24th July 2023

The National Security and Investment Act (NSIA) has been operational since January 2022 and has quickly cemented itself as a standard consideration in M&A deals. Transactions in the UK will require mandatory notification under the NSIA if the target engages in specified activities in one or more of 17 qualifying sectors – covering areas including defence, military & dual use, energy and communications.

Where a transaction does not involve a target active in a qualifying sector, any notification made is deemed to be “voluntary”. The voluntary regime allows parties to submit transactions for approval that they suspect will be called in by the government and also allows deals to be called-in by the government retrospectively even if not voluntarily notified.

The first full Annual Report on the NSIA is the first to cover a full 12 months’ operation and provides some valuable insights into the review process. We set out 5 of the key takeaways and what they mean for investors navigating the regime.

Voluntary filings represent a fairly high proportion of cases that are ultimately called in for review

Of the overall 866 notifications received, 21% were voluntary notifications. More significantly, 17 of the 65 transactions called-in for review related to transactions notified voluntarily.

Voluntary notifications do not necessarily pose a lower risk of scrutiny, and companies submitting voluntary filings should be prepared that their deal may be called-in.

No penalties for failure to file have been imposed

To date, the ISU has not imposed any fines for failing to:

1. comply with an interim or final order;
2. for completing without approval; or
3. for failure to comply with an information or attendance notice.

The vast majority of deals (93%) are cleared unconditionally within 30 working days

Of the 866 transactions notified, the ISU reviewed 766, called in 65 and ultimately intervened on just 15 occasions on the basis of national security.

This is in line with the previous NSIA Annual Report in terms of the review of all transactions within the 30-day statutory period. This should provide some deal certainty and allow parties to account for set timelines.

The defence sectors are likely to be scrutinised most carefully

The Annual Report shows that for mandatory notifications, there is a notable sectoral focus around five areas: Defence, Critical Suppliers to Government, Military and Dual Use, Data Infrastructure and Artificial Intelligence. In particular, 47% of transactions notified under the mandatory regime related to the Defence sector.

The high proportion of Defence sector mandatory filings suggests that this section of the NSIA may be drafted more widely, catching a larger number of transactions, whereas other sectors may be more restrictive, imposing more specific criteria that excludes a greater number of deals.

The most common commitments relate to information safeguarding

1. Final orders were only imposed on 15 transactions (with one revoked). Of the 15, five final orders blocked the transaction or required unwinding.
2. Of those cleared with conditions, the majority of commitments involved behavioural remedies, as opposed to structural remedies.
3. The most common behavioural commitments involved the restrictions on the sharing of, or access to, certain information.

Information sharing is clearly a key concern but there is a lack of UK guidance on the formulation of remedies. As such, our view is that such concerns may be mitigated by offering up robust commitments to ensure that sensitive information is protected from unauthorised access.

The NSIA’s first full annual report does shed some helpful light on timelines, types of notifications, focus sectors and origins of investors, which should provide a practical steer for parties when assessing the impact of the NSIA on transactions. Directionally, this latest report is broadly consistent with the first report published last June in terms of process, volume of notification and sectors in focus, indicating that the compliance with and enforcement of the NSIA is unfolding generally as expected.

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This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.

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